President Obama’s New Cure for Student Debt

The federal government’s primary goal for higher education is to expand access. To that end, the government offers loans to more and more students. So far, this approach has enabled many more people to attend, but it has done nothing to keep tuition down. As a result, more people graduate, but they graduate with a lot of debt.

Speaking at the University of Buffalo on August 22, 2013, President Obama unveiled his plans to address the growing problem of student debt. The president’s plan features three big changes:

1. Rating System

Beginning in 2015, create a new rating system to rank colleges on value and the quality of their instruction. Then set funding for loans based on these rankings. These ratings would define value based on tuition, graduation rates, debt and earnings of graduates, and the percentage of lower-income students who attend.

Once this new system begins in 2015, it will then take a few years to test it. The government could use these rankings to modify funding starting in 2018. A reform this huge would require buy-in from Congress. And even if that were possible, this piece of the plan would not produce results until after Obama has left office.

2. Innovation

Jump-start competition between colleges to encourage innovation, especially when it comes to costs and affordability. Read: competency-based learning, more massive open online courses (MOOCs), and awarding more credit for non-traditional prior learning. All these things are happening already, but the President has called for making them more widespread.

Jaschik’s reporting includes this additional detail: “Obama is proposing to spend $260 million on a ‘First in the World’ fund that would ‘test and evaluate innovative approaches to higher education.’"

3. Repayment Options

Expand the means for graduates to manage and afford their college debt. Right now, certain people undergoing a “partial financial hardship” can apply to have their monthly payments reduced. Obama recommends allowing all graduates, not just some, to cap their payments at 10 percent of their monthly income. Matthew Yglasias, writing for Slate.com, points out one exciting feature: “spearhead an interagency process to publicize the existence of this option, since even under current eligibility rules it looks like there's a relatively low level of uptake. Coordination and publicity don't require congressional action.” So this part of the plan might actually happen. And that would be a very good thing.

The Other Side

Daniel Luzer in the Washington Post cautions that there could be a number of pitfalls to the president’s plan. “Enrolling all students in ‘pay as you earn’ programs but not providing schools with more money through Pell grants could result in massive funding shortages.” Talk about unintended consequences; imagine scores of colleges going out of business, all in the name of improving value.

Indeed, Obama’s plan appears to be far from perfect. There are two big problems in higher education for which Obama has yet to offer a solution. The first is the massive decline in state aid for public colleges. In many cases, colleges are increasing their tuition not out of greed, but to replace the money they’ve lost from their state budget cuts. A more comprehensive plan would look for ways to fill that gap.

The second problem is our current bankruptcy laws. Unlike other forms of debt, student loans are not dischargeable through bankruptcy. These laws encourage banks to lend enormous sums (which the government subsidizes) to students, without regard for their ability to repay the loan. Then they trap students beneath a mountain of debt with no legal escape. Graduates who’ve defaulted on their loans can even see their social security checks garnished. If President Obama really wants to help college students manage their debt, he could try changing our draconian bankruptcy laws.

Despite its flaws, the President’s plan is a welcome addition to a long-running dialogue. Of course, reforming education in America is a big project, and we have to start somewhere. It’s good to see the President taking seriously the needs of students in the 21st century. We can debate the details, but Obama’s proposal could be a good start toward making higher education available to all Americans.

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